42 Quarter One 2012

Feature

Corral your maverick spend

43Quarter One 2012

As a business, agreeing what to buy, and from whom, allows the

opportunity to negotiate suppliers hard. But when agreements

are undermined by rogue buyers going to suppliers outside the

deal, efforts come to nought. So what exactly is 'maverick' spend’?

In simple terms, it refers to procurement outside of a company's

contracts, systems or processes. A typical maverick spend, for example, might be

a staff member deciding that rather than buying a ream of A4 from a company's

contracted suppliers, they will instead pop into a neighbourhood stationary store

to pick some up – paying full retail instead of a discounted price. This type of

spending is usually labelled as something entirely different (and legitimate) on

expense claims, and becomes virtually impossible to track. Maverick spending

is usually buried in Maintenance, Repair and Operating (MRO) budgets – for

things like stationary, administration, raw materials and services – and in this

way it occurs 'under the radar', as opposed to large purchases like a new print-

ing press or a fleet of company vehicles which could never be hidden in the

'miscellaneous' column. In terms of prevalence, for organisations that pay little

attention to spend analysis it's likely maverick spending is widespread – more so

if decentralised buying is the status quo. Estimates vary widely, but once a spend

analysis has been undertaken and new policies and processes enacted, compa-

nies typically report annual cost reductions of at least 10 per cent - and up to 30

per cent or more is not unheard of.

So who are the maverick spenders and why do they do it? Essentially there

are two groups. The first group are rare but at the same time are nowhere near

as rare as we would like to think. Just a few of the most recent examples are

detailed in the sidebar 'Watch out for the cowboys' on page 44. They are simply

criminals who, once given access to an organisation's finances, will continue to

steal from that organisation until they are caught. The other group are far more

common - just ordinary staff members with no malicious intent, but who will

nonetheless flout a company's purchasing policies until they are brought into

line. For many managers, the answer to the 'why do they do it' question is actu-

ally hard to hear – because for the most part, it's management's fault. For once

they remove criminality as a motivator, organisations usually need look no fur-

ther than their own internal processes, efficiencies and controls for the reasons

behind their maverick spending problems.

With millions being wasted annually in ‘off-contract’ spending, David McNickel examines the human and systems drivers behind rogue spending and explores how e-procurement systems can turn the tables on the mavericks - delivering real cost savings…

Maverick MotivationsOur procurement process sucksOffice staff whose printer is out of ink can't wait until tomorrow for the next stationary delivery. They have work to do today so will be forced to buy retail to get their jobs done. What about the actual buy-ing process? Are there endless screens, login codes and line item details to fill in? Is it possible your team avoid the 'official channel' because it's too complicated and takes too long?

Who knew? If your people don't know about the new sup-plier contracts you have negotiated, or they're not informed that buying retail is actually forbidden, they'll be mavericks without even realising it. Have you recently merged or acquired other businesses or branches? Has purchasing training for these new staff been a priority?

Head Office can get stuffedDecentralised management makes sense for things like setting marketing priorities, driving sales and providing regionally responsive services, but in these times of nationwide next-day delivery, are there really any benefits to decentralised purchas-ing?

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44 Quarter One 2012

Name: Jonathan Kirkpatrick Arrested: 2011Position: CEO of AUT's Business Innovation Center

Victim: AUT UniversityStole: $665,000Method: Kirkpatrick set up numer-ous false companies through which to invoice AUT. With his signing approval for invoices up to $15,000 Kirkpatrick was able to steal $665,000 over the course of 10 years at the University.

Name: David Don Arrested: 2011Position: Accountant, St Patrick's College Wellington

Victim: St Patrick's CollegeStole: $126,000Method: Employed by the prestigious Wellington boys school for five years, Don recently pleaded guilty to eight charges of “accessing a computer to obtain a benefit” and money laundering.

Name: Richard Watson Arrested: 2010Position: General Manager & Financial Controller at The Ross Group

Victim: The Ross GroupStole: $5.5 millionMethod: In computer banking transac-tions, Watson transferred money into his own accounts but entered the names of legitimate company creditors into the payee details box. This enabled his continuing fraud to go undetected for 10 years.

Name: Trevor Esera Arrested: 2009Position: Accountant & IT ManagerVictim: RinnaiStole: $1.75 millionMethod: Esera faked accountancy and business school degrees, then set up fictitious companies through which he invoiced Rinnai 350 times over six years to the value of $1.75M. He then approved payment of the invoices and the money was deposited into his wife's accounts.

Name: Martyn Scott Arrested: 2010Position: Company accountantVictim: National Fire & Security Stole: $1.4 millionMethod: Over the course of six years Scott created fake invoices and paid the money into his own accounts. He also took genuine invoices and paid those into his accounts and made 'double pay-ments' of invoices - where he would legitimately pay an invoice but then pay the exact amount again to himself.

Name: Sonya Causer Arrested: 2009Position: Payroll ManagerVictim: Electrical Retailers Clive Peeters

Stole: A$19 million Method: Over a two year period Causer used her position as an accountant and senior member of Clive Peeters' finance team to transfer millions to herself and her front companies. A major Australian electrical retailer, Clive Peeters collapsed into voluntary administration in 2010, due in part to Causer's large scale fraud.

Name: Herminia Lanuza Arrested: 2009 Position: Financial con-troller Victim: Importer (name suppressed)

Stole $2.7 millionMethod: Throughout her six year tenure as financial controller, Lanuza recorded legitimate invoices as being paid while she channeled the money into her own accounts. She also drew cheques from her company illegitimately and obtained unauthorised direct credit from the BNZ. After her arrest company management described the business as left virtually insolvent.

Name: Christopher Sue Arrested 2006Position: Company Accountant & Finance ManagerVictim: Turners AuctionsStole: $2.8 millionMethod: During seven years in vari-ous financial roles at Turners, Sue used false accounting to direct millions into his accounts and also pocketed secret commissions from international vehicle suppliers. He was only caught when he intensified his activities while filling in for the firm's financial controller who was on maternity leave.

Watch out for the coWboys Maverick spending in NZ & Australia is by no means limited to a couple of extra highlighters and an unneces-sary back-up printer cartridge. Procurement authority and access to a company's financial systems is seen by many as an open invitation to steal, and the thieves are routinely among an organisation's most trusted employ-ees. Below are just a few of the most recent cases.

Feature // eProcurement

45Quarter One 2012

Stopping the mavericksThe first step to eliminating rogue spending in an organisation is to conduct

a 'spend analysis'. While we won't go into great detail about that here (that's a

feature on its own) the short story is that when undertaking a spend analysis an

organisation drills very deep into its procurement systems and asks; what are we

spending, who is doing the spending, who are they spending with and what are

the processes by which we are spending? The answers to those questions are

usually surprising and should result in a spend management overhaul. This typi-

cally involves dramatically reducing maverick spending, gaining the maximum

leverage from an organisation's buying power, removing process inefficiencies

and building in management spend visibility. In today’s marketplace, one funda-

mental deployment that increases the likelihood of spend management initia-

tives being successful, is an e-procurement solution. The reason for this, says

Peter Kane of e-procurement specialists Unimarket, is that they help businesses

achieve 'one way to buy'.

How so? Consider a maverick steer in a western movie – away from the herd,

free to roam wherever it wants with no restrictions. Now picture the same ani-

mal in a pen, its movements efficiently channelled with no opportunity to stray.

Applied to procurement the rogue spender is the maverick, but channelled

through an e-procurement system they have only one path to follow and simply

can't wander off.

“What a number of organisations struggle with,” says Kane, “is they have some

systems dealing with some purchasing, and other systems dealing with other

purchasing, and it's very hard for them to get the total picture. So the goal is

to get one way of spending, one way that they do their purchasing.” Although

e-procurement has been around since the earliest days of the internet, failures

like the e-commerce dotcom crash and the government pulling the plug on its

GoProcure system in 2003 have at times dampened enthusiasm for the con-

cept. Similarly, older in-house procurement systems with poor usability and com-

plicated protocols have also slowed progress in the field. More recently, however,

widespread consumer adoption of online shopping and the much enhanced

usability of Web 3.0 design styles has driven an expectation from staff that

similar 'Amazon-ish' purchasing platforms should be available in the workplace.

“People want to be able to buy at work as simply as they buy at home” says

Kane, “but with the older technologies those aspects [technical protocols] were

more ingrained in the systems in a way that impacts on the user experience.

A couple of the key tenets of the Unimarket philosophy are ease of use and

transparency. Our solution is very user friendly, but at the same time it has all the

controls and disciplines in the technology so the finance & procurement people

have what they're looking for from the system.”

SaaS vs In-house applicationsOnce an organisation has undertaken a spend analysis, e-procurement has

the potential to deliver cost savings in three key areas – process efficiency, con-

tract compliance and price reductions through leveraging buying power – either

as an individual company, or better yet, as part of a trade buying group. They

will then have to make a decision around what type of solution to deploy – either

Software as a Service or an in-house application. The good news for many –

especially those who already have in-house ERP and are concerned about their

legacy investment – is that it doesn't necessarily have to be an 'either/or' scenario,

and can actually be both. For organisations with existing ERP functionality, many

ERP vendors already supply specialist purchasing modules which may well

be the right procurement solution, although they are also often accompanied

by specific annual licensing fees for the module. If a company in this scenario ››

46 Quarter One 2012

wants to opt for e-procurement in the cloud, Kane says they can quite easily

discontinue their existing purchasing module (saving the annual licensing fees)

and integrate a cloud-based solution like Unimarket directly into their legacy ERP.

“For an organisation that's already made investments in ERP, they're looking at

the cost benefit associated with cloud solutions, and finding it quite compelling.

There's a realisation that the benefit of that legacy investment is what you can

do with what bolts on top of your ERP system.”

One such benefit is spend visibility. “Dashboards deliver the standard reports

that cover off the core things that procurement and finance will be looking for,”

says Kane. “But they can then also upload to their own data warehouses to do

data manipulation if they want more in-depth analysis. It's very easy to slice and

dice in any way that a customer might be looking for.” Companies that wish to

maintain de-centralised purchasing can also benefit from e-procurement in the

cloud. Regional offices can all log into their organisation's cloud portal for pur-

chasing from approved suppliers (aggregating their spend and limiting contract

leakage), deliveries can be made to the individual locations (as per the negoti-

ated contract) while oversight can be maintained at a central facility. IT spend-

ing with cloud based e-procurement should also decrease. Product catalogues

are maintained by suppliers, so all the staffing expense of maintaining product

databases in a system is moved to them. Software licensing costs are reduced

as well, as rather than issue licenses on a 'per seat' basis, cloud-based services

usually provide an annual subscription service – meaning as many staff as

required can access the system at no extra cost. “There's an initial upfront setup

and configuration cost,” says Kane, “but after that it's all you can eat from a user's

perspective.”

Get with the program Before maverick spending can be tamed and cost savings delivered, however,

spend management needs to be taken seriously by all parties – and driven from

the top down. After a spend analysis is undertaken, a spend management plan

can easily be prepared that optimises the procurement process - but once that's

done management needs to ensure that its new purchasing policies are clearly

understood by all in the buying chain. And as uncomfortable as it may be for

some, policies must be enforced. Branding irons probably won't be required for

these modern day mavericks, but staff do need to understand there will be con-

sequences for off-contract spending and corrective action will be taken against

rogue spenders.

We'll cross that bridge... As the managing director of the Charted Institute

of Purchasing & Supply, Jonathan Dutton heads up the Australasian arm of an entity focused specifically on help-ing organisations and individuals improve their procurement practices. Like most, his take on 'maverick' spenders is that good systems and processes will clean most of them out eventually, but that might take longer in Australia and New Zealand, because the relatively small size of our markets has many organisations wondering if it's worth making the sys-tems investment just yet.

“In the old world there was lots of maverick spend,” he says, “and in the future world there will be very little. We're just on a bridge between the two at the moment.”

So what's keeping us from getting to the other side? Dutton says unlike companies in Europe or North America which have their pick of competing vendors, purchasers in Australia and New Zealand are nowhere near as well served with potential suppliers. With monopolies and duopolies being the order of the day, procurement routines here are typically well established and entrenched, he says, and managers struggle to see the potential payoff from investing in new solutions. Either that, he says, or a company that's grown through acquisitions and inherited a range of legacy procure-ment procedures thinks to itself “well there's a lot of time, money and effort involved in overhauling all that - what's the reward, what's the benefit if all the existing systems are still working okay?”

Dutton foresees a continued steady decline in maverick spending, due to higher standards and training for procure-ment managers - and the gradual introduction of new IT sys-tems simply not allowing it.

“Good procurement processes now are increasingly indi-visible from good software,” he says. “If a user's choices are constrained and presented in a way that enforces better con-trol - that's usually a very good thing.”

BEFORE MAvERICK SPENDING CAN BE TAMED AND COST SAvINGS DElIvERED, HOWEvER, SPEND MANAGEMENT NEEDS TO BE TAKEN SERIOUSly By All PARTIES – AND DRIvEN FROM THE TOP DOWN.

Feature // eProcurement